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Third Circuit: All-Events Test Allows Business to Deduct Unredeemed Loyalty Perks.

(Parker Tax Publishing MAY 2016)

The Third Circuit held that the Tax Court had misapplied the "all events" test as it relates to recurring expenses in disallowing deductions claimed by a supermarket chain based on unredeemed rewards shoppers had earned for gasoline purchases. The appellate court concluded that, for purposes of the test's "fixed liability" prong, it was irrelevant that neither the total amount of the supermarket's anticipated liability nor the identity of all the customers who eventually applied discounts toward gasoline purchases could be conclusively identified at year's end. Giant Eagle, Inc. v. Comm'r, 2016 PTC 159 (2016).


Loyalty programs have become increasingly popular with businesses of all sizes. A loyalty program gives various types of rewards to customers who frequent the business. The aim of a loyalty program is keep a customer tied to a business or a brand, thus increasing the business's future revenue.

Generally, a loyalty or rewards program may be in the form of:

(1) a discount program, where participants receive instant discounts on products at the point of sale;

(2) a rebate or cash back program, where customers accrue benefits that are redeemed at some future point; or

(3) a points program, where customers accrue points, credits, or miles when they purchase the company's products and can redeem the rewards for free or discounted products or services in the future.

The tax issues that surround such programs generally involve the proper year for deducting the rewards and a determination of whether the "all-events" test has been satisfied. The Code does not limit the availability of deductions to expenses for which payment is certain. Rather, accrual method taxpayers are expressly allowed to deduct expenses before they are paid, so long as certain conditions are met.

Under Code Sec. 461(h) and Reg. Sec. 1.461-1(a)(2)(i), a liability is incurred, and generally is taken into account for federal income tax purposes, in the tax year in which all the events have occurred that (1) establish the fact of the liability, (2) establish with reasonable accuracy the amount of the liability, and (3) establish that economic performance has occurred with respect to the liability.

With respect to refunds and rebates, Reg. Sec. 1.461-4(g)(3) provides that, if the liability of a taxpayer is to pay a rebate, refund, or similar payment to another person (whether paid in property, money, or as a reduction in the price of goods or services to be provided in the future by the taxpayer), economic performance occurs as payment is made to the person to which the liability is owed. Nonetheless, certain recurring items are subject to a more relaxed version of the "all events" test if the requirements of Code Sec. 461(h)(3)(A) are met. One requirement is that economic performance with respect to such items occurs within the shorter of a reasonable period after the close of the tax year, or 8 and 1/2 months after the close of the tax year. Another requirement is that such item must be recurring in nature and the taxpayer consistently treats such item as incurred in the tax year in which the "all events" test is met, and either (1) such item is not a material item, or (2) the accrual of such item in the tax year in which the requirements of the "all events" test are met results in a more proper match against income than accruing such item in the tax year in which economic performance occurs.


Giant Eagle, Inc., an accrual-method taxpayer, owned and operated supermarkets under the name "Giant Eagle" and gas stations under the name "GetGo." It the 1990s, it began a customer-loyalty program called Advantage Cards. In 2004, Giant Eagle revised the Advantage Card program. The new program, called "fuelperks!", linked customers' rewards at the pump to prior grocery purchases. For every $50 spent on qualifying groceries, an Advantage Cardholder earned a 10 cents-per-gallon discount on gas. The fuelperks discounts expired three months after the last day of the month in which they were earned and could not be redeemed in cash.

Giant Eagle claimed deductions for unredeemed fuelperks for 2006 and 2007. The IRS denied the deductions, claiming Giant Eagle did not meet the all events test of Code Sec. 461(h) and Reg. Sec. 1.461-1(a)(2) to currently deduct its liability for fuelperks because the liability was not fixed until customers redeemed the perks.

Giant Eagle argued that the fuelperks program constituted a unilateral contract under which it became legally obligated to redeem fuelperks as they were accumulated. Thus, its liability for the outstanding fuelperks was fixed at the end of 2006 and 2007.

Tax Court Denies Deduction

The Tax Court agreed with the IRS and held that Giant Eagle could not deduct the unredeemed fuelperks before they were redeemed. Under the fuelperks promotion, the Tax Court noted, redemption of fuelperks was structured as a discount against the purchase price of gas. Consequently, the purchase of gas was necessarily a condition precedent to the redemption of fuelperks.

While the court noted that redemption of fuelperks could conceivably discount the purchase price of gas to zero, the right to redeem fuelperks without paying to purchase gas (i.e., for a free tank of gas) would be contingent on the setting of the retail price of gas immediately before the purchase. Accordingly, whether a customer paid something for the purchase of gas or nothing, Giant Eagle's obligation to redeem fuelperks was subject to a condition precedent that could be satisfied only after the close of its tax year. Thus, the court concluded that Giant Eagle's liability for outstanding fuelperks became fixed upon their redemption and not when the customer earned the fuelperks as Giant Eagle had contended. As a result, the court rejected Giant Eagle's deductions in 2006 and 2007 for the outstanding fuelperks. Giant Eagle appealed to the Third Circuit.

Issue on Appeal

On appeal, the IRS did not contest that fuelperks rewards qualify as both "a rebate, refund, or similar payment" and a "recurring expense" subject to the less onerous economic performance requirement. Moreover, the IRS conceded that Giant Eagle calculated its anticipated fuelperks-related liability with reasonable accuracy, and that economic performance had occurred by the time of Giant Eagle's tax filing. Thus, the only issue on appeal was whether "the fact of liability" was fixed at year's end. Specifically, before the end of the tax year, had Giant Eagle become liable to pay the fuelperks 10-cent discount to its customers who had purchased qualifying groceries with their Advantage Cards?

Third Circuit Reverses Tax Court

In a 2-1 decision, the Third Circuit reversed the Tax Court's holding and concluded that Giant Eagle was entitled to the deductions taken on its 2006 and 2007 tax returns for the outstanding fuelperks.

According to the court, for purposes of the "all events" test's fixed liability prong, it was irrelevant that neither the total amount of Giant Eagle's anticipated liability nor the identity of all the customers who eventually applied discounts toward gasoline purchases could be conclusively identified at year's end. And while there remained an extremely remote and speculative possibility that the amount of Giant Eagle's claimed deductions would overstate the value of the rewards its customers ultimately redeemed, the court said, Giant Eagle significantly mitigated that risk by tracking its customers' monthly redemption rates and offsetting the deductions accordingly to account for prospective non-redeemers. Giant Eagle amply demonstrated to the court the existence - as of year's end - of both an absolute liability and a near-certainty that the liability would soon be discharged by payment. The court found that, as conceded by the IRS, the chance of nonredemption had been calculated by Giant Eagle with reasonable accuracy. The "all events" test, the court observed, demands no more.

The Third Circuit also concluded that by disallowing deductions claimed on the basis of established recurring expenses, the Tax Court effectively obliterated the distinction between two accounting methods expressly authorized by the Code. The extent to which cash and accrual methods of accounting sometimes yield different deductions is a byproduct of the Code's design, the court said, and so long as a taxpayer consistently adheres to one accounting method, the Code is agnostic as to the benefit or hardship wrought by his selection.

OBSERVATION: In a dissenting opinion, Judge Hardiman said that Giant Eagle's liabilities were not determined until fuelperks were redeemed. According to the judge, the question for resolution was whether Giant Eagle's liability to any individual shopper with accrued-but-not-yet-redeemed fuelperks was certain to continue under the rules applicable to that liability until it was paid. Because one of those rules allowed for the expiration of each shopper's fuelperks (and Giant Eagle's corresponding liability to that shopper), the answer was plainly "no." While Giant Eagle became liable to a shopper at checkout, the judge said, it did not become absolutely liable to that shopper unless and until the shopper redeemed fuelperks before their expiration. For that reason, the judge said he would hold that, at the close of the 2006 and 2007 tax years, Giant Eagle faced many fixed liabilities for yet-to-be-redeemed fuelperks, but none that were "determine[d] in fact" because each was contingent upon future redemption by the shopper.

For a discussion of the all-events test, see Parker Tax ¶241,520.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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